Buying innovation vs buying protection: What we know about public procurement of innovation

Europe is turning public procurement into an instrument of industrial policy. The Industrial Accelerator Act and the proposed Public Procurement Act would let public buyers favour European suppliers in strategic sectors, and Beijing has already threatened retaliation. This column reviews what economic research so far tells us about public procurement as an innovation policy. Public procurement appears to spur innovation, most often incremental innovation, particularly among young and small firms, but only when tenders leave room for new solutions and buyers have the skills to manage them. Closing markets to foreign firms is a different policy though, and its potential benefits appear highly dependent on careful targeting and design.

Public procurement is becoming the centrepiece of European industrial policy. In March 2026, the European Commission proposed the Industrial Accelerator Act (IAA), which would attach “Made in Europe” and low-carbon requirements to public tenders, auctions and support schemes in sectors that include batteries, solar panels, wind turbines, electrolyzers, vehicles, steel, aluminium, and cement (European Commission 2026a). On 9 September 2026, the Commission proposed a Public Procurement Act. This directly applicable Regulation would replace the three 2014 directives and give every public buyer in the Union an optional “European preference” toolbox (European Commission 2026b). Buyers could restrict participation to firms from the EU and from countries covered by the WTO Government Procurement Agreement or by EU trade agreements, require EU origin, grant price or scoring advantages, and reject tenders in which EU or covered content falls below 50% of the contract value. China has no procurement agreement with the EU, and its government has already warned of countermeasures against the IAA (Euronews 2026).

Both proposals descend from the Draghi report, which diagnosed a European innovation gap in strategic sectors such as digital technologies, artificial intelligence, and clean energy and called for public intervention to create lead markets for European producers (Draghi 2024). They also respond to a financing problem. European venture capital investment in 2025 was about a fifth of the US level, although the two economies are of similar size (Lerner 2026). Europe does not lack savings, but too little of them reaches European risky equity, and capital markets remain fragmented along national lines (Angeloni and Cavallini 2026, Garnier 2026). If private investors do not fund young technology firms at scale, the public sector can act as their first customer. Public buyers spend around 15% of EU GDP every year, a demand that can contribute to creating the market for innovation that venture capital fails to finance.

A European preference is not the only, nor the main way in which public procurement can stimulate innovation, and supports two very different readings. In the first, it is a demand-side version of infant-industry protection. In the second, the preference is a trade measure that raises procurement costs, softens competition, and invites retaliation. Which reading prevails in Europe depends on whether public demand actually triggers innovation, and on how procurement is designed.

What do we know about procurement as innovation policy?

While the role of public procurement as a demand-side ‘pull’ innovation policy has been widely acknowledged (e.g. Geroski 1990, Maurer and Scotchmer 2004, Cabral et al. 2006, Edler and Georghiou 2007, Mazzucato 2013), it remains unclear to what extent it works and which measures should be implemented to maximize its effectiveness. In a recent survey (Chiappinelli et al. 2025), we review the existing, rigorous economic literature on public procurement of innovation (PPI) around four questions: whether it works, how it should be designed, what hinders it, and how it fits into the wider policy mix. The review suggests the following:

Does PPI spur innovation?

The answer is a qualified yes, and the strongest evidence comes from the US. For example, Howell (2017) finds that a small early-stage award from the US Small Business Innovation Research (SBIR) programme roughly doubles a firm’s chance of raising venture capital and increases its patenting and revenue. Large public demand shocks have shaped the direction of US technology for decades, from WWII research contracts to the Space Race (e.g. Gross and Sampat 2023 and Kantor and Whalley 2023). Three qualifications matter. The innovation induced appears often incremental, with due exceptions public procurement tends to accelerate diffusion more than breakthroughs. The effects are concentrated among young, small, and financially constrained firms. And they emerge when firms have room to propose their own solutions. When the US Air Force ran an ‘open’ version of its SBIR programme alongside a conventional one in which it specified what it wanted, only the open awards increased venture funding and patenting, while the conventional programme fostered incumbency and lock-in (Howell et al. 2025). While more scant, European evidence points in the same direction. For example, in Germany, contracts that rewarded innovative features increased firms’ innovation, though mainly incrementally and green procurement had positive effects on green innovation that were strongest for small firms (e.g. Czarnitzki et al. 2020 and Krieger and Zipperer 2022).

How should PPI be designed?

There is no one-size-fits-all design. For example, bundling R&D and follow-on production helps but only when the innovation mainly serves the public sector and if there are large economies of scope between R&D and implementation (e.g. Che et al. 2021). Granting the government greater discretion is beneficial when innovation quality and innovator effort are difficult to specify contractually, provided that the buyer has adequate capabilities. Technology-neutral award rules favour exploration but leave rents to suppliers, while technology-specific rules reduce rents at the risk of locking in the wrong technology (e.g. Fabra and Montero 2022). The effect of greater competition on innovation is ambiguous, depending on the uncertainty surrounding contract specifications and the characteristics of suppliers (e.g. Bhattacharya 2021). Larger demand scale, obtained through centralisation or joint procurement, is crucial to strengthen the incentive to innovate (e.g. Ahuja et al 2021, Clemens and Rogers 2026).

What hinders PPI?

One main barrier, besides a small scale, lies with the lack of capabilities of the buyer. The competence of procurement officials, which is an important driver of contract performance in the case of standard procurement (e.g. Decarolis et al 2020), becomes crucial for the case of procurement of innovation. For example, in US military R&D, the death of a contracting manager significantly reduces the probability that a project delivers patented inventions (Decarolis et al. 2021).

Where does PPI fit in the policy mix?

In some circumstances, demand-side procurement might outperform supply-side policies when used in isolation. However, there are synergies between the instruments, indicating that a policy mix, for example combining procurement with R&D subsidies, can have a greater impact (e.g. Guerzoni and Raiteri 2015).

Overall, it seems that well-designed procurement can be an effective innovation policy, but the available evidence is thinner than the policy ambition, and public procurement remains among the least rigorously evaluated innovation instruments.

Lessons for the IAA and the Public Procurement Act

Read through this evidence, the proposals contain a design tension. Public procurement may spur innovation by opening markets to new ideas and new entrants, while a European preference narrows the pool of bidders. The two goals can coexist under conditions that the proposals do not yet guarantee.

• Target, and expect diffusion more than breakthroughs. A preference works as industrial policy only where it addresses an identifiable externality, such as learning spillovers in emerging technologies. Procurement mainly accelerates the adoption of known technologies, which fits the IAA’s focus on scaling up batteries, heat pumps or solar manufacturing. Closing the frontier gap in digital and AI technologies, however, requires R&D-stage instruments such as pre-commercial procurement, together with deeper risk capital markets.
• Award on quality and keep tenders open. Since price-only tenders depress innovation, the proposal to make the best price-quality ratio the default award method, with at least 30% of points assigned to quality, may matter as much as the European preference toolbox. Functional specifications should describe needs rather than prescribe technologies. Origin rules and content thresholds impose compliance costs that incumbents bear more easily than the young firms that gain most from PPI.
• Pool demand at EU level. Market size drives innovation. A preference applied voluntarily by the multitude of public authorities across Europe risks fragmenting the very lead markets the IAA wants to create. Only joint procurement of strategic technologies, as for COVID-19 vaccines, can deliver the necessary scale.
• Invest in buyers before adding tools. The new rules ask contracting authorities to determine origin, compute content shares and justify exemptions. Without professional training, specialised central purchasing bodies and more resources, contracting authorities will struggle to implement the new requirements effectively, limiting their ability to leverage procurement strategically to foster innovation.

Public procurement can potentially be a powerful lever for European innovation, and the limited available evidence supports using it more ambitiously. Buying innovation and buying protection are, however, different policies. If the IAA and the Public Procurement Act end up rewarding origin rather than novelty, Europe may pay higher procurement costs and face Chinese retaliation without closing its innovation gap.

Source : VOXeu